Do you consistently feel as though you’re barely scraping by even though your family’s income level looks pretty good on paper? If so, you’re not alone.
Thousands of middle-class families across the country are experiencing the sense of being squeezed, despite the fact that their annual incomes are far above the U.S. median household income of $48,201. Even families making double that amount may struggle at times to cover their expenses, let alone save anything after all their bills are paid.
How can this be? In their book “The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke,” Elizabeth Warren and Amelia Warren Tyagi report that the average two-income family “earns far more today than did the single-breadwinner family of a generation ago. And yet, once they have paid the mortgage, the car payments, the taxes, the health insurance, and the day-care bills, today’s dual-income families have less discretionary income — and less money to put away for a rainy day — than the single-income family of a generation ago.”
That’s right, folks — you’re not imagining it. Your parents had an easier time making ends meet than you are. Especially if you live in an expensive area of the country, and even more especially if you have children, it can be shockingly easy to watch your discretionary income evaporate before you even know what happened to it.
Can you do anything to combat this punishing trend? Yes, you can. The following tips may not resolve all your money worries, but hopefully they will give you some practical ideas for lightening your load.
1. Recognize when you’re in the danger zone. If you’re part of a two-income household, how strapped are you? To be more specific: If anything at all were to go wrong — say, a job loss, a divorce or an illness that prevented one of you from working for a time — could all of your bills be covered by just one income instead of two? If your answer to this question is no, it’s time to start reflecting on how much money you have in savings. Most of us know that we should have an emergency fund stashed away that could cover six months of living expenses — and most of us haven’t gotten around to doing that. The psychological benefits of having this cushion cannot be overstated, however. The easiest way to start building such an emergency fund is to view the amount you stash away as another monthly bill. Could you realistically handle one more $50 bill? How about a $150 bill? Immediately start squirreling away a regular chunk of change for yourself.
2. Think about your housing costs. Have you and your partner stretched yourself to buy a house that you only could afford by becoming “house poor” and dedicating big chunks of both incomes to the cause? This can be a very dangerous practice. (Review tip No. 1 to understand why.) Many people get themselves into this pickle, though, because they want to live in a neighborhood in a good public school district. Parents are often willing to do almost anything to help their children get a good start in life education-wise. That said, you won’t be doing your kids any favors if you spread yourself too thin with this crucial investment. Heck, you actually could lose the roof over your heads if a single thing goes wrong in your lives, even temporarily. So what should you do? You could rent for another year or two or three in that same neighborhood with the good schools before buying a home. Or, as inconvenient as this may be, you could buy a home that’s much smaller than the home you want. The main objective is to make sure that your house or rent payment can easily be covered by just one income. If you’ve already taken on the monster mortgage and you feel yourselves sinking, consider simplifying your lives by downsizing if you possibly can.
3. Reflect on your wheels. It can be easy to ridicule Americans who drive around in gleaming, large vehicles and saddle themselves with whopping car payments in the process. Frankly, it’s risky to do this, especially if you’re already feeling squeezed — but families with children often take on this added expense for reasons that are anything but frivolous. Newer vehicles tend to have the highest safety ratings — and who doesn’t want to keep their kids safe? Also, depending on how many children you have, you may opt for a larger vehicle so you have enough room for those legally mandated car seats and booster seats. All of that said, here are some ideas to help you save money in this area:
- Have just one car payment instead of two. One of your cars could be the family vehicle, and the other one could be a much-less-expensive-but-dependable used car that doesn’t require a car payment and hopefully relies on much less gasoline. Keep driving the used car as long as you can, even if it’s held together with duct tape.
- Own just one car instead of two. It goes without saying that a car isn’t a luxury in many pedestrian-unfriendly parts of the country — and if you both work, it’s easy to see why you each may need your own car. But is it remotely possible for one of you to commute to work in a different way? Walking, riding a bike, taking public transportation, carpooling or tapping into a car-sharing program could help you save thousands of dollars a year.
- Qualify for independent financing for that family vehicle. It’s a common mistake to think that the dealership needs to arrange your car loan for you. Be aware that such financing is a key source of profits for car dealerships, and it’s quite likely that you could find a loan with a better interest rate elsewhere.
4. Increase your deductibles. Deductibles are the sums of money you have to fork over before your insurance policies come to the rescue. You could save a bundle by contacting all of your insurers — for your home, automobiles and health and disability plans — and bumping your deductibles up by a few hundred dollars apiece. Rick Brooks, a financial planner from Solana Beach, Calif., pointed out why this approach often makes sense. “Few people will file a claim with an insurance company for a $500 repair because of the effect it will have on (their) insurance rates,” Brooks said. “Yet many policy deductibles are set at just that amount. I suggest that people think about what they would be willing to pay out of pocket. If that’s $1,000, then set the deductible at $1,000. This can have a huge impact on the cost of insurance for a family.”
5. Treat credit-card debt like the plague that it is. Unfortunately, many families and individuals grappling with excessive money worries have gotten themselves into a bind with credit cards. Credit cards can be your friends — but only if you’re scrupulous about paying your balances off in full and on time each month. If you’re already weighed down with debt, though, try this: Transfer your credit-card balances to a card with a lower interest rate right away. You’ll save $730 if you transfer a $2,000 balance from an 18-percent card to an 8.25-percent card and then pay off your balance at a rate of $50 a month. Even better, transfer balances to cards with rates of 0, 1 or 2 percent if you can and concentrate on paying them off entirely while those low rates last. Here are some additional insights from Edward Gjertsen II, a financial planner in Glenview, Ill.: “I created the ‘Seven-Day Cash Challenge’ that has clients put away the credit card and use cash — (not a debit card, but cash) — to pay for most everything for seven days. This helps them quickly realize how much flows out in everyday expenditures. … From this we build upon the premise (that) it’s not what you save that is critical to wealth-building, it’s realizing what you spend.”
6. No matter how strapped you are, don’t skimp on your retirement savings. Saving for retirement may seem like a low priority when you’re feeling squeezed. But in many cases, you can view your contributions to a 401(k) or 403(b) tax-deferred retirement plan as an instant raise. That’s because many employers will match your contributions up to a certain point. Don’t let such free money slip away! Even if you don’t get a match from your employer, get in the habit of regularly socking away at least some money for retirement. You’ll be glad you did so at tax time — and in your later years as well. As William Keen, a financial planner from Norcross, Ga., put it: “Remember that kids can borrow for education, but you can’t borrow for retirement.”
7. Play the percentages game. Jan Dahlin Geiger, author of the book “Get Your Assets in Gear! Smart Money Strategies,” recommended that people should decide up front how to allocate their spending by percentages and then work out the details afterward. She provided this example:
- Total income: 100 percent.
- Long-term savings: 10 percent. (This is savings for financial independence.)
- Short-term savings: 5 percent. (This is for an emergency fund, repairs and unexpected expenses.)
- Taxes: 25 percent.
- Housing expenses: 25 percent. (This includes mortgage/rent, utilities, repairs, upkeep, landscaping.)
- Car expenses: 10 percent. (This includes car payments/savings, insurance, gas, repairs.)
- Everything else: 25 percent. (This includes food, clothes, vacations, gifts, expenses for children, restaurants, entertainment and the million other things that pop up.)
“Most people who take time to do this exercise realize they are spending far more than 25 percent on housing and far more than 10 percent on cars,” said Dahlin Geiger, a financial planner in Atlanta. “The big ‘aha’ finally hits and they realize why they can’t save anything. … Until you look at the big picture like this, most people are just throwing Band-Aids at their situation.”
8. Pay careful attention to your tax bracket. Yet another reason many two-income families feel pressured financially is that they often make just enough money to stop qualifying for valuable tax credits, such as the child tax credit. “I do a lot of tax work, and middle-class families are the ones that get whacked,” said Daniel Wishnatsky, a financial planner in Phoenix. Wishnatsky recommends working with a tax professional, not simply a tax preparer, to find ways to minimize taxes. “This is a huge issue,” he said. “If nothing else, folks need to realize that a nice raise … requires prudent planning.”
9. Find a reputable financial planner. You can attain real peace of mind by getting control of your money matters and putting a smart financial plan in place for the years to come. You can accomplish this by hiring a fee-only financial planner through the National Association of Personal Financial Advisors, the Financial Planning Association or the Garrett Planning Network. (Fee-only planners do not make commissions by selling you certain financial products.) You may end up paying an hourly rate of about $150 to $250 to get the help you need – not dirt cheap, but potentially worth it if you can get your house in order for the next five to 10 years in the span of a few hours. When contacting the organizations referenced here, specify that you’re looking for a fee-only financial planner. Depending on your needs, you could spell out that you’re looking for a fee-only planner who also is an experienced tax professional.
10. Understand your money personalities. This last tip is a special one just for couples. In order to apply any of the tips suggested here successfully, you’re both going to need to be on the same page together. This can be difficult if you have wildly different money personalities. To find out whether you do, take this quick quiz at Moneyharmony.com. Compare your answers and results carefully, and use this as a springboard for a frank — yet non-judgmental — conversation about your approaches to money. Remember to stay calm and take lots of deep breaths!
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